INSUBCONTINENT EXCLUSIVE:
By Kuntal SurFinancial institutions (FIs) in India like their global counterparts are under pressure from business unit leaders,
investors and boards of directors, and their regulators to deliver improved and more transparent performance management data in
Many of these pressures are driven by regulatory changes that emerged in the post-crisis era
FIs were accustomed to managing their businesses with summarised financial information, based largely on generally accepted accounting
Now, they are required to include a wider range of information at a more granular level, with both accounting and risk-based views
This requirement has been magnified by the following drivers.1
Regulations encompassing risk and finance functions such as BCBS 239 and FRTB Regulations
2
Greater use of forward-looking measures for financial statements such as IFRS 09/Ind AS 109 and IFRS 17/Ind AS 117
3
Information required for strategic business decision making (such as capital management, risk-based finance decision, liquidity
Higher costs associated with duplicative infrastructure for risk and finance functions and increased stress on timely reporting
What is risk
and finance alignmentRisk and finance alignment is a conscious, organised way of more closely linking some, but not all, elements of both
risk and finance functions
It requires a comprehensive and pragmatic view of the risk and finance functions, especially from the point of view of data management,
organisation and governance, process management, technology, and standards and definition.
This may require new ways of thinking about risk
and finance, the processes that are executed, the controls in place as well as the systems that store data
It will also require resolving the differences between two functions that have fundamentally different cultures.
The mission of finance is
to find ways to improve business performance while conforming to largely pre-defined accounting and regulatory mandates
In the past, most of the accounting standards were backward-looking for cost and reserves
The risk function uses much of the same data as finance, but uses it differently
Specifically, risk inputs data into models to predict future outcomes based on correlations, analytics and assumptions with a higher
reporting frequency and velocity
With relatively few industry standards for risk management, each financial institution has tended to focus on different measures and methods
As a result of its mandate, risk has largely preferred to have imperfect information faster whereas finance required additional quality and
The numerous benefits derived out of risk finance alignment include greater cost savings, improved controls, greater transparency, the
ability to make better business decisions and improved compliance with regulatory mandates.
Drivers of risk and finance alignment The shift
towards risk and finance alignment is being driven by both the way FIs are doing business and by the evolving regulatory
environment.
Internal drivers: The closer alignment of risk and finance within financial institutions is largely motivated by internal
changes to business models
Specifically, it is observed that the industry under pressure does the following:
Reduce costs: Reducing costs requires elimination of
duplicative or inefficient tasks currently conducted by both risk and finance
However, changes should focus on streamlining processes and promoting aligned reporting while improving quality.
Drive profitability: FIs
are under pressure to increase returns on each transaction
Improvements in both forward-looking analytics and capital information enable organisations to better price for risk and risk-taking in the
These improvements can help drive profitability in an environment where their business models and market opportunities are
constrained.
Strengthen controls: The business can better focus on effective and efficient controls when it no longer needs to spend time
doing manual workarounds and reconciliations.
Attract and retain talent: FIs want to provide employees with challenging career paths that
may span both the risk and finance functions
Providing these opportunities will help better prepare future leaders and provide incentives for the most talented individuals to stay
within the organisation.
External drivers: New regulations have increased the compliance cost of FIs in a significant way
Due to the urgency of regulatory deadlines, FIs generally implemented one-off highly manual solutions
And while these regulations worked in the past, heightened regulatory standards that focus on governance, tone at the top and continuous
improvement are now forcing these institutions to adopt a holistic view of the regulatory changes and the associated impacts.
The four
dimensions of risk and finance alignment The concept of risk and finance alignment is still at a very nascent stage and requires detailed
Management has multiple views on the scope and granularity of risk and finance alignment
To illustrate, there are divergent views on:Whether the concept should be broadened to include alignment of the entire finance and risk
functions or whether it should apply to only specific areas within these functions;
Whether the alignment should apply to data alone or also
to the systems that produce the data.
In order to clarify the issue and better frame the areas on which the CRO and CFO should focus their
energy, we define the following four dimensions of risk and finance alignment.
Data management: It comprises all the disciplines related to
managing data as a strategic asset
The dimension defines and resolves data sourcing and quality management to make the environment fit for use
It requires a common, agreed-upon set of standards and definitions for use when functions interact and communicate with each other.
Process
Management: It refers to the agreement of business process flows between people, agreement on how people use systems, and agreement on how
people do reporting and analysis
Process management should be defined for both expected results and any processing exceptions.
Organisation and governance: This dimension
defines the roles and responsibilities within and across the risk and finance groups, and any associated committees
It provides the organisational structure and establishes the operating standards that span the two functions.
Technology: Traditionally,
technology is the collection of computer hardware, software and other tools needed to run the business
However, recent disruptive technologies such as artificial intelligence, machine learning and blockchain require organisations to relook at
the way they conduct business.
It is important to realise that in any organisation, risk and finance functions do not operate in silos
They interact with each other as well as other business functions -- importantly, IT and operations
Alignment of the two functions will have an impact on the operating models of business
It's , therefore, pertinent that organisations develop a target operating model covering governance, organisational design, and process
management for a successful risk and finance alignment
(Kuntal Sur is Partner, Financial Services (Risk and Regulation Leader) at PwC India)
